Unconventional Mortgages Attract Warning From Regulator

WASHINGTON—A type of unconventional mortgage that focuses on a borrower’s assets to vet repayment ability has drawn a warning from regulators for banks to maintain tight underwriting standards.

Asset-depletion loans, also known as asset-dissipation loans, are part of a small but growing subset of the mortgage market that includes subprime loans and other riskier products. They assume borrowers draw from assets to cover a mortgage, rather than just income. They are designed for people who don’t have a conventional paycheck, including retirees or workers in the gig economy, and were traditionally aimed at high-net-worth individuals with portfolios that could be easily converted into cash for mortgage payments.

Now the loans are reaching a broader set of borrowers, raising concerns that lenders aren’t properly measuring their risk.

(snip)

The OCC, which regulates national banks, is asking lenders to tighten underwriting standards, ensuring they don’t overestimate borrowers’ ability to draw on their assets to pay down their mortgage. Fannie Mae and Freddie Mac , two companies that support about half the nation’s mortgage market by buying mortgages from banks and other lenders, typically require such loans to be based on a borrower’s 401(k) or other employment-related asset. In recent years Fannie and Freddie have eased standards for those loans, allowing lenders to ask for a smaller down payment from elderly borrowers or assume the assets would be tapped over a shorter period, increasing the estimated monthly payout.

(snip)

The OCC is advising lenders that make asset-focused loans to divide the borrower’s assets by the full term of the loan—or to follow timelines comparable to traditional mortgages—to estimate how much they could draw each month to cover the expense.

More..

https://www.wsj.com/articles/unconventional-mortgages-attract-warning-from-regulator-11567071004 (paid subscription)